Distributional Effects of Globalization in Developing Countries
One of the few uncontroversial insights of trade theory is that changes in a
country’s exposure to international trade, and to world markets more generally, affect the
distribution of incomes within the country. Not surprisingly, the entry of many
developing countries into the world market in the last three decades coincides with
changes in various measures of inequality in these countries. What is more surprising is
that the distributional changes went in the opposite direction from what the conventional
wisdom suggests: while trade liberalization was expected to help the less skilled, who are
presumed to be the relatively abundant factor in developing countries, there is
overwhelming evidence that they are generally not made better off relative to workers
with higher skill or education levels.
In Distributional Effects of Globalization in Developing Countries (NBER
Working Paper No. 12885), authors Pinelopi Koujianou Goldberg and Nina Pavcnik
attempt to explain this paradox. They question whether the underlying conventional
wisdom is too stylized to capture the reality of the developing world and they ask
whether other forces at work may have overridden the effects of globalization. They also
examine the mechanisms through which globalization has affected inequality and try to
determine whether general lessons can be drawn from the experience of the last three
decades.
The authors’ findings suggest a contemporaneous increase in various measures of
globalization and inequality in most developing countries, although establishing a causal
link between these two trends has proven more challenging. However, the evidence has
provided little support for the conventional wisdom that trade openness in developing
countries would favor the less fortunate.
The authors also find little support for the premise that adjustment to changing
economic conditions would occur through labor reallocation from declining to growing
sectors of the economy, at least at the aggregate industry level usually considered in
traditional international trade models of comparative advantage. A common finding of
studies of the effects of trade reforms in developing countries is the lack (or small
magnitude) of sectoral labor reallocation. In some instances, the data also suggest that the
wage response to trade barrier reductions is more pronounced than the employment
response.
The cumulative evidence points to constrained labor mobility as one plausible
explanation for the lack of sectoral reallocation. Indeed, the strict labor market regulation
that many developing countries had in place prior to the recent reforms is a potential
source of labor market rigidities. The importance of these rigidities is likely to diminish
in the long run, especially since many developing countries have by now significantly
liberalized their labor markets.
The authors’ findings highlight several globalization-based explanations for the
increased relative demand for more educated workers within industries. In some cases,
trade reforms that liberalized, in addition to goods flows, factor flows (most importantly
capital) may have generated additional demand for skilled workers. In other instances,
globalization affected not only trade in final goods, but also trade in intermediate goods
that, from the developing country perspective, were skill-intensive. Even in those cases
where liberalization was concentrated on final goods, the highest trade barrier reductions
often were concentrated – contrary to conventional wisdom – on low-skill sectors that
originally had enjoyed a higher level of protection. Technological change that favored
skilled workers may have interacted with trade reforms to further depress the relative
demand for low-skilled workers. Increased exposure to currency fluctuations boosted
exports from developing countries in some cases and provided incentives to upgrade the
product-mix of their domestic plants. These compositional changes may have fostered a
quality upgrading of plants that further contributed to the widening of the wage gap
between skilled and unskilled.
Overall, it appears that the particular mechanisms through which globalization
affected inequality are country-, time- and case-specific; that the effects of trade
liberalization need to be examined in conjunction with other concurrent policy reforms;
and that implementation details of particular policies matter. This conclusion may seem
disappointing, according to the authors, as it offers no simple predictions regarding the
distributional impact of globalization and hence no straightforward recipe for remedial
measures to alleviate potentially adverse impacts. Yet, it is hardly surprising given the
heterogeneity of countries, reforms, and overall globalization experience within the
developing world.
Finally, the authors emphasize that most of the existing evidence refers to narrow
measures of inequality such as the skill premium, or wage inequality. Broader concepts
of inequality that focus on consumption and general well-being have received
substantially less attention. The very scant evidence that exists on these issues, however,
seems to suggest that the labor market effects of globalization dominate its effects on
consumption through relative price changes, so perhaps the focus on wages alone is not
as limiting as one would have thought.
(Les Picker)
Quote: “While trade liberalization was expected to help the less skilled, who are
presumed to be the relatively abundant factor in developing countries, there is
overwhelming evidence that they are generally not made better off relative to workers
with higher skill or education levels.”